Quarterly Report Germany IV/2017

QUARTERLY REPORT GERMANY

German economy grows by over two percent.

Companies scaling up investments Quarter IV / 2017



The pace of economic growth in Germany picked up considerably in the third quarter 2017. After price, calendar and seasonal adjustment, GDP increased by 0.8 percent over the previous quarter, following 0.6 percent growth in the second quarter.



Companies are stepping up investments in Germany again: Gross fixed capital formation increased by 0.4 percent over the previous quarter.

Capital investment in equipment rose 1.5 percent and 0.6 percent in other assets over the previous quarter. Investment in construction dropped slightly but remains high.



Consumption surprises: Following strong growth in the second quarter, household consumption expenditure dropped by 0.1 percent after price, seasonal and calendar adjustment.



Net exports and the domestic economy contributed equally to GDP growth in the third quarter 2017. Exports increased by 1.7 percent in the second quarter – almost double the growth in imports.



We expect real economic output to increase by 2.25 percent over the previous year, corresponding to an annual GDP growth of 2.5 percent following calendar adjustment.

Content The German economy ......................................................................................................................................... 1 Foreign trade: exports strong in third quarter ......................................................................................................... 2 Labour market: unabated rise in employment ........................................................................................................ 4

Industry ................................................................................................................................................................ 5 Clear increase in order intake in third quarter 2017 ............................................................................................... 5 Industrial production accelerating nicely into the second half of the year .............................................................. 6 Industrial capacity utilisation high .......................................................................................................................... 7

Outlook ................................................................................................................................................................. 9

Imprint ................................................................................................................................................................ 11

Basic data for national accounts...................................................................................................................... 12

German economy grows by over two percent. Companies scaling up investments 19/12/2017

The German economy Upturn continues to gather strength In the third quarter, the German economy really picked up pace. Germany's gross domestic product (GDP) increased by 0.8 percent over the previous quarter (price, calendar and seasonal adjusted), after going up 0.6 percent in the second quarter. First quarter growth in 2017 was upwardly revised to 0.9 percent. Compared to last year, GDP increased by 2.3 percent in the third quarter. After calendar adjustment, the increase totalled 2.8 percent, following an increase of 2.3 percent in the second quarter. According to preliminary calculations, economic output in the third quarter was generated by a workforce of 44.5 million people. That amounts to 668,000 (or 1.5 percent) more people than in the same period last year.

Growth in real GDP in percent

4

3 2.2 (1.-3. quarter) 1.9 1.7

2

1.6

1

0

-1 I

II

III

IV

2014

I

II

III 2015

change over previous year quarter

IV

I

II

III

IV

2016

change over previous quarter

I

II

III

IV

2017

change over previous year

Source: Federal Statistical Office

On the income side of GDP, economic output increased in almost all economic sectors year on year in the third quarter. The information and communication sector experienced the strongest growth, with gross value added increasing by 3.6 percent and jobs going up accordingly. In manufacturing, gross value added increased by 3.4 percent, an above-average result for the sector. Job increase was comparably low, however, going up by only 0.9 percent. Trade, transport and hospitality was the third strongest performer, with value added rising by 3.1 percent and 128,000 more people working in the sector than one year ago. Corporate services and construction both registered average growth in value added, with employment figures going up correspondingly. Agriculture, real estate and other services recorded below average growth in gross value added. Financial and insurance services registered a drop in both gross value added and the number of workers. By contrast, the number of people working in public services, education and healthcare increased by a total of 207,000 or 1.9 percent.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

There were a few surprises on the domestic front on the expenditure side of GDP. Consumption expenditure of private households dropped by 0.1 percent compared to the previous quarter after price, seasonal and calendar adjustment, following a substantial increase of 0.9 percent in the second quarter. As public sector consumption was on a par with the previous quarter, consumption expenditure overall pulled GDP growth down a notch. Gross fixed capital formation increased by 0.4 percent over the previous quarter. While investment in plant and equipment (up 1.5 percent) and in other assets (up 0.6 percent) increased over the previous quarter, construction investment dipped slightly. Including changes in inventories, gross fixed capital formation contributed 0.5 percentage points to growth, bringing the total contribution to growth in domestic expenditure to 0.4 percentage points. In the third quarter 2017, the contribution of net exports to GDP growth drew even with the domestic economy. In the second quarter, exports climbed 1.7 percent in comparison to the previous quarter – almost twice the pace of growth in imports resulting in a contribution to growth of 0.4 percentage points.

Foreign trade: exports strong in third quarter In the third quarter 2017, exports of goods and services rose by 19.6 billion euros or 6.6 percent year on year (country-specific seasonally adjusted data not available). Deliveries to euro area countries accounted for almost one third of the increase. Exports to the Netherlands increased by 1.4 billion euros, to France by 1.26 billion euros and to Italy by 1.08 billion euros. Trade with EU countries outside the euro area was equally buoyant.

Exports to Poland increased by 1.3 billion euros, to the Czech Republic by 749 million euros and to Sweden by 529 million euros. The biggest growth in absolute terms was in exports to China. Goods exported to China totalled just over three billion euros (up 15.7 percent). There was also a surge in exports to Hong Kong, which increased by 626 million euros or just under 40 percent. On the down side, exports to the United Kingdom dropped by 776 million euros or 3.6 percent in the third quarter, while exports to Egypt and the United Arab Emirates fell by 202 million euros and 223 million euros respectively.

Imports to Germany also rose sharply in the third quarter 2017, going up 7.7 percent compared to the previous quarter. The strongest nominal growth was in trade with China (up 2.08 billion euros), the Netherlands (up 1.54 billion euros), Spain (up 1.2 billion euros) and South Korea (up 1.04 billion euros). Imports from Germany's neighbours to the east also climbed higher than overall average for imports, with goods and services from the Czech Republic going up by 964 million euros and from Poland by 960 million euros. Decreasing imports remained the exception, with figures for commodity exporters Algeria down by 131 million euros and Azerbaijan down by 196 million euros.

According to the latest data, exports increased by 6.8 percent in October 2017 compared to October last year.

Imports rose even more, going up by 8.3 percent. In the first ten months of the current year, a total of 6.3 percent more goods and services were exported than in the same period last year. Exports to the euro area increased by 6.6 percent, slightly more than to EU countries outside the euro area, which were up 4.8 percent.

The increase in exports to countries outside the EU, at 7.3 percent, was even higher.

Imports increased by a total of 8.7 percent in the first ten months of the current year. Goods and services imported from EU countries were up by 7.9 percent over the same period last year. Imports from countries outside the euro area rose by 9.8 percent, slightly more than imports from the euro area (up seven percent).

Imported goods and services from countries outside the EU increased by 10.2 percent in the same period.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Development of exports and imports in selected countries in Q3 2017 Year-on-year change increase (+) or decrease (-) in exports in million euros

increase (+) or decrease (-) in imports in %

China

22 237

+ 3 026

+

15.7

Netherlands

21 232

+ 1 398

+

Poland

15 012

+ 1 304

France

25 264

Italy USA

in million euros

in %

China

25 527

+ 2 084

+

8.9

7.0

Netherlands

22 112

+ 1 539

+

7.5

+

9.5

Spain

7 497

+ 1 203

+ 19.1

+ 1 261

+

5.3

South Korea

2 892

+ 1 043

+ 56.4

15 697

+ 1 080

+

7.4

Czech Republic

11 107

+

964

+

9.5

27 365

+

977

+

3.7

Poland

12 622

+

960

+

8.2

Russia

6 808

+

819

+

13.7

9 915

+

858

+

9.5

Qatar

1 449

+

773

+ 114.4

Austria

10 417

+

694

+

7.1

Spain

10 215

+

768

+

8.1

Italy

13 456

+

657

+

5.1

Czech Republic

10 090

+

749

+

8.0

Singapore

1 786

+

596

+ 50.1

Ireland

2 040

+

694

+

51.5

671

+

568

+ 552.5

Austria

15 604

+

642

+

4.3

Romania

3 846

+

562

+ 17.1

Hong Kong

2 197

+

626

+

39.8

Mexico

1 720

+

490

+ 39.8

Sweden

6 384

+

529

+

9.0

UK

9 237

+

462

+

Mexico

3 380

+

463

+

15.9

Sweden

3 851

+

356

+ 10.2

Hungary

6 184

+

447

+

7.8

Malaysia

2 255

+

347

+ 18.2

Finland

2 685

+

420

+

18.5

Hungary

6 597

+

346

+

5.5

Chile

549

-

158

-

22.3

Bermuda

0

-

111

-

99.8

Egypt

750

-

202

-

21.2

Algeria

185

-

131

- 41.5

2 669

-

223

-

7.7

Aserbaijan

215

-

196

- 47.7

20 746

-

776

-

3.6

France

15 262

-

313

-

2.0

+

6.6

Total

+ 18 109

+

7.7

U. A. Emirates UK Total

317 029

+ 19 613

Belgium

Libya

253 562

5.3

Sources: Federal Statistical Office; own calculations

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Labour market: unabated rise in employment According to preliminary data from the German Federal Statistical Office, the number of people in employment rose to 44.74 million in October 2017. That means around 348,000 more people (or 1.5 percent) had a job than at the same time last year. The number of jobs subject to social security contributions also increased considerably. According to the latest projections by the German Federal Employment Agency, in September 2017 (latest available data) a total of 32.74 million people were in employment subject to social security contributions. This represents an increase of 727,000 people or 2.3 percent compared with one year ago.

German labour market* 33

4

Employed persons covered by social security (left axis)

32 31

3

30 29

Unemployed persons (right axis) 2

28 27 1

26 25 2

24

0

Difference in the number of workers making social security contributions from the same month last year (right axis) *seasonally adjusted in million Source: Federal Employment Agency

Looking at the individual sectors, services led the way, recording a clear increase in the number of jobs. In contrast to last year, the largest growth in jobs subject to social security contributions in absolute terms was in skilled corporate services, which created 101,000 new jobs, an increase of 4.3 percent. In long-term care and social services, which has always posted the strongest absolute increase in jobs in the past, the number of jobs increased by 3.7 percent or 83,000 in the space of one year. The number of jobs increased by 69,000 in manufacturing, by 66,000 (or 4.5 percent) in other business services and by 65,000 (or 1.5 percent) in the trade, maintenance and repair of vehicles. The number of workers in financial and insurance services displayed a contrasting development, dropping by 17,000 jobs or 1.7 percent.

The number of self-employed including contributing family workers dropped by 26,000, or 0.6 percent, to 4.33 million in the third quarter 2017. The number of people exclusively in marginal employment decreased by 63,000 (1.3 percent) to 4.71 million in September 2017, according to preliminary figures from the Federal Employment Agency.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

In November 2017, the Federal Employment Agency registered a total of 2.37 million unemployed individuals.

This represents a decrease of 164,000 people without employment, or 6.5 percent year on year. In November 2017 the unemployment rate as calculated by the Federal Employment Agency dropped to 5.3 percent or 3.6 percent according to ILO calculations.

Industry Clear increase in order intake in third quarter 2017 In the third quarter 2017, German industry’s order intake increased by 3.6 percent over the previous quarter following price, calendar and seasonal adjustment. The year on year increase is higher still at 7.8 percent. In the third quarter 2017, domestic demand was up 3.2 percent over the previous quarter following seasonal and calendar adjustment – a year on year increase of 7.7 percent.

New orders, manufacturing

122

9

120

8

118

7 6

116

5

114 3.6

4

112 2.6

3

110 2 108

0.8

106

1 0

104

-1 -1.0

102

-2

100

-3 2014

2015

2016

2017

Change over previous year, two-month-average, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

Demand from abroad also increased substantially, going up by four percent in the third quarter 2017 (after seasonal and calendar adjustment). Year on year, demand was up by 7.9 percent. While growth in orders from the euro area slowed slightly, going up by 0.6 percent in comparison to the previous quarter and 5.5 percent year on year, demand from countries outside the EU has picked up considerably. Compared to the previous quarter, orders increased by 6.3 percent. Year on year, they increased 9.4 percent – the sharpest rise registered since 2011.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Among the main groups of industrial goods, producers of intermediate goods received 4.6 percent more orders than in the previous quarter. Domestic orders registered an increase of 5.6 percent, slightly stronger than foreign orders, which increased by 3.6 percent. Compared to last year, orders for intermediate goods increased by 9.8 percent.

Demand for capital goods increased by 3.6 percent quarter on quarter. Domestic demand for capital goods increased by 1.2 percent over the second quarter, while foreign demand for capital goods increased by 4.9 percent. Year on year, demand for capital goods was up 6.6 percent.

Orders for consumer goods producers almost drew level to the second quarter figure (up 0.1 percent).

Domestic demand increased by 2.4 percent in the second quarter. Orders from abroad, by contrast, posted a drop of 1.4 percent. Year on year, producers of consumer goods recorded a total increase in orders of 6.4 percent.

According to preliminary estimates from the Federal Statistical Office, industry's order intake in October increased by 0.5 percent over the previous month. The proportion of large orders was below average for October. Demand from at home and abroad was more or less equally strong.

German industry’s order books have filled out nicely in the course of the year. Demand from at home, the euro area and countries outside the EU has increased across the board both in quarter on quarter and year on year comparisons over the last two quarters – this has not been the case since the upturn after the recession in 2009.

In view of the robust order intake and the high level of capacity utilisation, companies are unlikely to work through all these orders by the end of the year.

Industrial production accelerating nicely into the second half of the year In the third quarter of 2017, manufacturing output increased by 1.7 percent over the previous quarter following seasonal and calendar adjustment. This was not only the fifth quarterly increase in a row, the pace of growth in production has also risen continuously over this period. Compared to the previous year, industrial production in the third quarter 2017 increased by 4.7 percent – the seventh consecutive quarterly increase and the strongest growth in production seen in six years.

The increase was spread equally among the main industrial groups. Production of intermediate goods increased by 5.3 percent over the previous quarter in the third quarter 2017, slightly higher than average and the sixth quarterly increase in a row. Producers of capital goods managed to expand production by 4.7 percent in the third quarter compared to the third quarter last year – the seventh consecutive quarterly increase and the strongest increase since 2012. Consumer goods producers registered a 3.6 percent increase in output in the third quarter, just under the overall industry average but still the seventh quarterly increase in output for this sector.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Production, manufacturing

118

6

116

5

114

4

112 3 110

1.8 1.3

108

2

1.4

1 106 0

104

-1

102 -1.8 100

-2 2014

2015

2016

2017

Change over previous year, two-month-comparison, in percent (right axis) Volume index in manufacturing, two-month-average, seasonally adjusted (left axis) Change over previous quarter (q-o-q), in percent Source: Federal Statistical Office

The latest figures show a decrease of 1.4 percent in industrial production for October 2017 compared to the previous month. Output was down in almost all main industrial groups. Owing to the public holidays in October (two fell on a Tuesday) this drop is in part due to the large numbers of people who opted for a long weekend. On top of that, the figures for September were upwardly revised. Seen year on year, however, production was still up by 2.7 percent.

Industrial activity has picked up clearly in the second half of the year. The current trend in incoming orders, the high volume of orders in hand and the sunny business prospects ahead all point to a spirited start to 2018.

Industrial capacity utilisation high The robust surge in production seen recently has further increased capacity utilisation. In the fourth quarter 2017, the industrial capacity utilisation rate increased for the sixth consecutive time to reach 87.1 percent.

Capacities are therefore being used 4.1 percentage points more than on average in the last ten years. This is the highest deviation from the average ever recorded. The order backlog in industry again increased slightly in the fourth quarter 2017. Averaging 3.3 production months, it is only marginally lower than the all-time peak of 3.4 months achieved in 2008. At 0.4 production months over the ten-year average, orders are as high as they were in 2007 and 2008.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

ifo Business-Cycle Clock German manufacturing*

Upswing

Boom November 2017

Business expectations for the next six month

25 Jan 2014 15

Jan 2011

Jan 2010 5 Jan 2015

Jan 2017 Jan 2012

-5

Jan 2013

-15

Recession

Downswing

-25 -30

-20

-10

0

10

20

30

40

50

Assesment of current business situation * Balances, seasonally adjusted Source: ifo Institut

Business sentiment hits all-time high Sentiment in German trade and industry is excellent according to the ifo Institute of Economic Research. The ifo business climate index climbed up even further in November 2017, rising 0.7 points to reach a new record high of 117.5 points. A substantial improvement in prospects pushed up sentiment, although companies were slightly less optimistic about the current business situation than in October. Looking at the individual sectors, sentiment in wholesale was the most optimistic. Wholesalers had a much brighter view of current business and expect prospects to improve further in the next six months. Sentiment in retail was slightly more subdued. Here, the current situation is rated substantially lower, although companies are still optimistic about the six months ahead. The business climate index in the building industry proper has slipped, but is down from a very high level. Current business and prospects are still rated positively, but with slightly less exuberance than before. In manufacturing the business climate index reached a new record high in November 2017, despite a lower rating of the current situation. Following July, August and October, that is the fourth record high this year. Prior to 2017, the last record high was eleven years ago in December 2006. According to ifo, an increasing number of companies are planning to raise their prices. Export prospects improved in November 2017 for the third time in a row, reaching their highest level in over six years.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Outlook By all accounts, the German economy has been expanding for at least five years now. The pace of growth has picked up substantially again this year. In the first three quarters, economic output increased year on year by over two percent. Almost all economic indicators point towards further acceleration rather than a slowdown in the fourth quarter 2017. We therefore need to adjust our annual growth forecast for 2017 once again.

The main driver of economic growth in Germany is likely to be private consumption. The level of employment continues to increase, particularly the number of jobs subject to social security contributions, thus recurring income. The high demand for labour should push wages and salaries up and increase job security. The consumer climate, as measured by market research company GfK, only just missed the record high of the previous month in November 2017. Private consumption expenditure this year is therefore heading for an increase of 2.3 percent rather than the previously estimated 1.8 percent. Based on the results of the first three quarters, we now expect state consumption expenditure to increase by just 1.5 percent. Overall, this would equate to a 2.1 percent in consumption expenditure.

BDI forecast for 2017 and comparison: real economic output, change over previous year

BDI

Federal Government

European Commission

GDP, real

2.2

1.4

2.2

Consumption

2.1

-

-

- Private Consumption

2.3

1.4

2.1

- Public Consumption

1.5

2.3

1.8

3.8

1.7

3.8

- Construction

4.0

1.9

-

- Machinery and Equipment

3.5

1.2

2.6

- Other

3.7

2.2

-

Exports

4.0

2.8

3.6

Imports

5.0

3.8

4.6

-0.1

-0.1

-0.1

Investment

Net Exports, Economic Output

Sources: Federal Government, European Commission (November 2017), own calculations

Investment activity has exceeded our estimates so far. The upward revision of the first quarter 2017 changed the figures significantly. We now believe that investment in plant and equipment could rise as much as 3.5 percent, one full percentage point more than estimated in September 2017. The recent surge in incoming orders, rising capacity utilisation and improved export prospects should trigger further investments in the remaining fourth quarter.

9

German economy grows by over two percent. Companies scaling up investments 19/12/2017

In the first three quarters of the year, construction investment already increased by 3.7 percent year on year. In view of the high capacity utilisation and strong rise in jobs in the construction industry, we expect an overall increase in construction investment of four percent this year. Investment in other assets (software, research and development) has recorded such a strong performance so far that we now expect an overall rise of 3.7 percent this year.

Our projections for foreign trade have not changed since September. In view of the global economic upturn, German exports of goods and services should increase by around four percent. We expect imports to increase by as much as five percent. On account of the steep increase in imports, foreign trade is likely to make a marginally negative contribution to growth.

All in all, we expect real economic output to increase for the year overall by 2.25 percent over the previous year, corresponding to growth in GDP of 2.5 percent after calendar adjustment.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Imprint Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin T: +49 30 2028-0 www.bdi.eu Author Thomas Hüne T: +49 30 2028-1592 t.huene@bdi.eu Editorial/Graphics Dr. Klaus Günter Deutsch T: +49 30 2028-1591 k.deutsch@bdi.eu Marta Gancarek T: +49 30 2028-1588 m.gancarek@bdi.eu

This Quarterly Report is a translation based on ”Quartalsbericht IV / 2017” as of 11 December 2017.

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German economy grows by over two percent. Companies scaling up investments 19/12/2017

Basic data for national accounts **

GDP (price, seasonally and calendar adjusted) Change over previous period in percent 2016 2015

2016

Q3

2.2

2.5

0,3

-Private Consumption

2.0

2.0

-Public Consumption

2.7

2017 Q3

Q2

Q3

0.6

0.7

0.7

-0.1

0,4

0.6

0.8

0.9

-0.1

4.0

0,2

0.5

0.2

0.2

-0.0

1.7

2.3

0,5

-0.0

2.9

1.5

0.4

-Machinery and Equipment

3.7

1.1

0,7

-1.3

2.3

3.3

1.5

-Construction

0.3

3.0

0,2

1.0

3.5

0.5

-0.4

-Other

1.9

2.6

0,9

-0.4

2.0

0.9

0.6

Domestic Demand

1.6

2.3

0,8

0.8

0.3

1.2

0.4

Exports

5.2

2.6

-0,2

1.3

1.7

1.0

1.7

Imports

5.5

3.7

0,7

2.5

0.4

2.4

0.9

Total

1.7

1.9

0,3

0.4

0.9

0.6

0.8

Consumption

Investment

Q4

Contribution to growth (in percentage points) Consumption

1.6

1.8

0,2

0.4

0.5

0.5

-0.1

-Private Consumption

1.1

1.1

0,2

0.3

0.5

0.5

-0.1

-Public Consumption

0.5

0.8

0,0

0.1

0.1

0.0

0.0

0.3

0.5

0,1

0.0

0.6

0.3

0.1

-Machinery and Equipment

0.2

0.1

0,1

-0.1

0.2

0.2

0.1

-Construction

0.0

0.3

0,0

0.1

0.3

0.1

0.0

-Other

0.1

0.1

0,0

0.0

0.1

0.0

0.0

Change in stocks and the like

0.0

-0.2

0,4

0.3

-0.8

0.2

0.4

Domestic Demand

1.5

2.1

0,7

0.8

0.3

1.1

0.4

Net Exports

0.2

-0.2

-0.4

-0.4

0.6

-0.4

0.4

Investment

Source: Destatis

12